The Legal & Institutional Framework for the Operation of Deposit Insurance Scheme in Nigeria

The Legal & Institutional Framework for the Operation of Deposit Insurance Scheme in Nigeria

Chapter One

Aim and Objectives of the Study

This study aims to prevent or drastically minimize distress and failures in financial institutions through legislation to promote financial stability and soundness in the system.

The objectives of this work are:

To examine the legal framework and evolution of financial institutions in Nigeria
To carry out a critical examination of the legal framework for the regulation of Deposit Insurance companies in Nigeria;
To provide new perspectives on the regulation of Deposit Insurance companies in Nigeria.

CHAPTER TWO

LITERATURE REVIEW

Statutory Framework for Operation of Deposit Insurance Scheme in Nigeria

The major enactments which constitute the legal framework for the regulation of Deposit Insurance companies in Nigeria shall be examined hereafter.

Central Bank of Nigeria (Establishment) Act

It would appear necessary to define a Central Bank and its evolution in Nigeria because of its pivotal role in the economy as the foremost financial institution before an examination of the provisions of the Central Bank of Nigeria (Establishment) Act on the regulation of Deposit Insurance companies in Nigeria.

What is a Central Bank?

A Central Bank has been defined by a good number of scholars. J.L. Jhingan, says a Central Bank has been defined in terms of its functions.⁴⁰ According to V. Smith, the primary function of central banking is a banking system in which a single bank has either complete control or a residuary monopoly of note issue.⁴¹ To A.C.L. Day, a Central Bank is to “help control and stabilize the monetary and banking system”.⁴² In the words of Sayers, the Central Bank “is the organ of government that undertakes the major financial operations of the government and by its conduct of these operations and by other means, influences the behaviour of financial institutions so as to support the economic policy of the Government”.⁴

A Brief History of the Central Bank of Nigeria

The establishment of the Central Bank of Nigeria marked the single most important milestone in the evolution of Deposit Insurance companies in Nigeria. An eminent scholar says one of the most important changes in the evolution of the monetary and financial system in Nigeria is the establishment of the Central Bank of Nigeria in 1958.⁴⁹ The failure of many banks in the early fifties mainly due to the absence of legal regulation of their activities gave added impetus to the agitation for the establishment of the Central Bank of Nigeria.

Adeeko listed the deficiencies which stimulated the agitation for a Central Bank in Nigeria as follows:

First, the WACB (West Africa Currency Board) did not provide the distinctive national currency prerequisite for an independent country, since the WACB currency circulated in four British colonies of West Africa. Secondly, there was no specialized financial monetary management training for Nigerians. Thirdly, the developments of indigenous financial institutions as well as money and capital markets were neglected. The final fault was the investment of reserves and other financial resources in London because of the absence of local investment channel.⁵⁰

According to Ekezie,⁵¹ sequel to the collapse of many banks during the free- banking era (1892-1952) there was an urgent need for a legislation to control banking in Nigeria. As a result of the pressure which the Nationalists mounted on the colonial Government, the PATON Commission was set up by the colonial Government in 1952. The report of the Commission gave birth to the first Banking Ordinance of 1952.

CHAPTER THREE

NIGERIA DEPOSIT INSURANCE CORPORATION ACT

The Nigeria Deposit Insurance Corporation Act is one of the major regulatory enactments over Deposit Insurance companies in Nigeria. The Nigeria Deposit Insurance Corporation (NDIC) was established by Decree No. 22 of 1988 on June 15, 1988.¹²⁷ The Corporation is a body corporate with perpetual succession and a common seal and may sue or be sued in its corporate name. The corporation is a crucial financial safety-net for insuring the deposit liabilities of licensed banks and other deposit-taking Deposit Insurance companies in Nigeria and ensuring the safety and stability of the financial sector of the economy.

According to a writer, Deposit Insurance Scheme was considered as an additional framework to serve as a substitute to the government support policy (implicit insurance) hitherto in place. Prior to the establishment of the corporation, government was unwilling to let any bank fail no matter its financial condition due to the fear of the potential adverse effects. Consequently, inefficient banks were given government support over the years. However, such direct supports (implicit insurance) could not be sustained under the structural adjustment programme introduced in 1986 which, among others, deregulated the economy towards market orientations.¹²⁸

What appears to be the reasons or justification for the introduction of explicit deposit insurance in Nigeria through the establishment of the Corporation was given by Ebhodagbe.

CHAPTER FOUR

REGULATORY POWERS OF THE NDIC UNDER THE ACT

The Nigeria Deposit Insurance Corporation plays an important role in the regulation of insured Deposit Insurance companies in Nigeria. It has been pointed out that there is a dichotomy in the regulatory activities of the NDIC vis-à-vis those of the CBN over banks. Whereas, the NDIC is primarily concerned with the regulation of insured banks for safety and soundness to protect depositors’ interest, the CBN regulates the entire finance industry (banks and non-banks) for the stability of the system and for the effectiveness of the monetary policies in the country. The NDIC thus strengthens and complements the regulatory activities of the CBN over the insured banks.¹³⁴ The above analysis coming from an erstwhile Managing Director of NDIC is noteworthy.

This dichotomy is necessary to streamline the regulatory activities of the Central Bank of Nigeria and the Nigeria Deposit Insurance Corporate to avoid overlapping and conflict in their respective operations. The need to avoid conflict among regulatory authorities over Deposit Insurance companies in Nigeria necessitated, among others, the establishment of the Financial Services Regulation Coordinating Committee under section 43 of the Central Bank of Nigeria Act 2007.

It must be noted at this point that section 37 of the repealed NDIC Act 1988 which was apparently included to enhance better relations with the Central Bank by Nigeria is also contained in section 53 of the NDIC Act 2006.

CHAPTER FIVE

CONCLUSION AND RECOMMENDATIONS

From the legal perspective, finding solution to the recurring problem of distress and failures in Deposit Insurance companies in Nigeria is an important underlying theme in this thesis. The problem appears intractable because the government and crucial regulatory bodies have been grappling with it without success for a long time now.

The increasing state of helplessness foisted on individuals, corporate bodies and the government following a distress or failure in Deposit Insurance companies in Nigeria is economically strangulating and financially depleting, and it is a major cause of instability and unsoundness in the financial sector of the economy.

After critically evaluating the legal framework for the regulation of Deposit Insurance companies in Nigeria, this thesis identified weak and ineffectual legal regulation as the major cause of distress and failures in Deposit Insurance companies in Nigeria.

The aftermath or consequences of failure of legal regulation of Deposit Insurance companies in Nigeria is nightmarish as they undermine the stability and soundness of financial institutions. The major consequences identified in this work are malpractices in financial institutions, weak corporate governance, distress and failures and the advent of wonder banks or generally, Ponzi schemes in Nigeria.

This thesis also discovered that the subject of the legal regulation of financial institutions is a global issue, a position reinforced by the financial crises and meltdown experienced across the globe recently.

The above necessitates the call for the harmonization of municipal laws with international standards of regulation of financial institutions prepared by international financial bodies to strengthen the regulation of financial institutions worldwide. This explains why the thesis examined the impact of the International Monetary Fund (IMF) and the World Bank on Deposit Insurance companies in Nigeria, and also carried out a comparative analysis of the legal framework for the regulation of Deposit Insurance companies in Nigeria, Ghana and Britain (the United Kingdom) for the purpose of strengthening the legal framework for the regulation of the aforesaid institutions in Nigeria.

This work exposed the fact that, while self-regulation being championed today has some noteworthy features, but for the purpose of protecting financial institutions because of their sensitive nature, compliance and enforcement, state regulation through laws, codes and rules is preferred, with self-regulation playing a complementary role as internal mechanism for the enhancement of the regulation of the institutions.

In order to strengthen the legal regulation of Deposit Insurance companies in Nigeria and to promote, establish and sustain the culture of ensuring stability and soundness in financial institutions, this thesis has made recommendations that if accepted and implemented will eradicate or seriously minimize the problem of distress and failure(s) in Deposit Insurance companies in Nigeria.

Summary of Findings

The major aim of this study was to prevent or drastically mimimize distress and failures in Deposit Insurance companies in Nigeria. This study answered the research questions in the work.

The major summary of the findings are as stated hereunder:

The legal framework for the regulation of Deposit Insurance companies in Nigeria is weak and ineffectual.
The study discovered flaws, weaknesses, loopholes and outright omissions in most of the regulatory laws examined in this work.
The study found that malpractices in financial institutions, weak corporate governance, advent of wonder banks, and distress and failures were the major consequences failure of legal regulation of Deposit Insurance companies in Nigeria.
The study also discovered that although effective legal regulations of financial institutions may not totally prevent distress or failure, it will reduce it to the barest minimum.
One major finding in this study was that in Ghana, both banks and non-bank financial institutions face strict uniform regulatory rules, standards and requirements under the Banks and Specialized Deposit-Taking Institutions, while the regulation of non-deposit taking, non-bank financial institutions is under the Non-Bank Financial Institutions Act In Britain, the Financial Policy Committee (FPC) and Prudential Regulation Authority (PRA) are part and parcel of the Bank of England but have different regulatory responsibilities.
This work discovered that the International Monetary Fund (IMF) provides technical assistance to Deposit Insurance companies in Nigeria through the Central Bank of Nigeria, while the World Bank renders technical assistance on projects, infrastructure and programmes that support and promote the development of the financial system.
That the composition of the Financial Services Regulation Coordinating Committee (FSCC) is an impediment to the attainment of its

Recommendations

Following an extensive and critical evaluation of the legal framework for the regulation of Deposit Insurance companies in Nigeria, the following recommendations are put forward to address the weaknesses and flaws identified in the said laws.

Part VII of the AMCON Act (penalty section) should be amended to make unequivocal and specific provisions for offences and penalties for offences committed by staff of both the Corporation and eligible financial institutions because the present provisions (sections 54 and 55) are too general in nature. Section 57 of the AMCON Act should be amended to give the Corporation power to make regulations as the recognized authority on asset management in Nigeria but only subject to the approval of the Central Bank of Nigeria.
NDIC Act – section 45(1) (a) and (b) of the Act should be amended by replacing the words ‘fails to take all reasonable care’ with the words ‘fails to take care’ as retaining the former words may jeopardize the prosecution of directors, officers or staff of insured financial institutions for offences committed under the Act, because not only is the word “reasonable” not defined in the Act, it is also capable of different
EFCC Act – section 14 of the Act which deals with offences relating to financial malpractices should be amended to impose monetary and penal sanctions on financial institutions as opposed to the present situation where only officers of the said institutions are sanctioned, giving the institutions the leeway to breach the law with impunity and undermine their regulation.
Section 54(7) of the Securities and Investments Act which deals with payment in lieu of prosecution for failure to comply with the mandatory requirement of filing a registration statement by the issuer should be amended to make liable civilly, the issuer, its chief executive officer or officers, its principal financial officer and every person named as a member of the board of directors and in case the issuer is a foreign person, by its duly authorized representative in Nigeria, in case of loss of investors’ money as a result of the provision of section 54(5) of the Act which provides that no securities, or investments of a public company or collective investment scheme shall be issued, transferred, sold or offered for subscription by or sale to the public without prior registration of the securities or investment with the Commission. This work also recommends the amendment of section 67(a) of the Act on control of invitations to the public to declare categorically wonder banks and ponzi’s schemes generally as unlawful entities under the law in Nigeria. This should be given wide and regular publicity in both the print and electronic media because of the negative effect of their activities on financial institutions and the investing public they swindle at will.
The Bank Employees, (Declaration of Assets) Act is another regulatory enactment that was critically examined in this work. Section 13 of the Act should be amended to confer the power to make regulation for the effective implementation of the provisions of the Act on the Central Bank of Nigeria instead of the President as is the case now. This, it is suggested, should be done urgently as there appears to be no regulation in place yet. The Act should also be amended to impose a duty on the Managing Director/Chief Executive Officer of a financial institution to ensure their officers or staff of the said institution fill the Asset Declaration form mandatorily, and in default, should be sanctioned.
Section 23(2) of the Nigeria Deposit Insurance Corporation Act should be amended by deleting the word ‘persistently’ from it. This is because to allow an insured financial institution to ‘persistently suffer liquidity deficiency’ and ‘persistently contravene the provisions of any legislation or regulation relating to banking and financial crimes’ before the intervention of the regulator is a fundamental defect in the law which could lead to distress and ultimately failure of the affected insured institution. Also, section 24(1) of the Act on the conditions for terminating the insured status of an insured institution should be amended to give it (an insured institution) a specified time-frame within which to make mends instead of ‘within a reasonable time’ which is clearly indeterminate.

BIBLIOGRAPHY

PRIMARY SOURCES

Official Publications

Central Bank of Nigeria (2011). “Nigeria’s Engagement with Brettonwoods Institutions”. Understanding Monetary Policy Series, No.10.
The House of Lords Select Committee on Economic Affairs Report (2009). House of Lords Paper 101-1. London, The Stationery Office Limited.

SECONDARY SOURCES

Books

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Ajayi, O. Regulation of Banks and Financial Institutions. 1st ed. Lagos: Greyhouse, 1991.
Barth, J.R, Gerald Caprio, Ross Levine. Banking systems around the Globe: Do Regulation and Ownership affect performance and stability? Chicago: University of Chicago Press, 2001.
Bhole, L.M. Financial Institutions and Markets. 4^th ed. Delhi: Tata McGraw-Hill, 2004. Casu, B., C. Girardone, and P. Molyneux. Introduction to Banking. London: Pearson Education Limited, 2006.
Cyle, B. Corporate Governance. 6^th ed. London: ICSA Publishing, 2009.
Daniels, J.P. and D.D. Vanhoose. International Monetary and Financial Economics. 3^rd ed. Ohio: Thomson (South Western) 2005.
Danjuma, N. The Bankers’ Liability. Ibadan: Heinemann, 1993.
Ebhodaghe, J.U. Safe and Sound Banking Practices in Nigeria: Selected Essays. Lagos: Page Publishers, 1997.
Ekezie, E.S. The Elements of Banking (Money, Financial Institutions and Markets). Onitsha: Africana, 1997.

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